BILL ANALYSIS �
AB 166
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Date of Hearing: March 7, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 166 (Cook) - As Introduced: January 20, 2011
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Corporation Tax: minimum franchise tax
SUMMARY : Eliminates the annual minimum franchise tax.
Specifically, this bill :
1)Eliminates the annual minimum franchise tax currently imposed
on every incorporated corporation, qualified to transact
business, or doing business in California.
2)Eliminates the annual tax for a limited partnership (LP), a
limited liability company (LLC) not classified as a
corporation, a limited liability partnership (LLP), and a
qualified Subchapter S subsidiary consistent with the
elimination of the corporate minimum franchise tax.
3)Eliminates the annual tax for regulated investment companies
(RICs), real estate investment trusts (REITs), real estate
mortgage investment conduits (REMICs), and financial asset
securitization investment trusts (FASITs) consistent with the
elimination of the corporate franchise tax.
4)Applies to taxable years beginning on and after January 1,
2011.
5)Takes effect immediately as a tax levy.
EXISTING LAW imposes franchise tax on all corporations doing
business in California equal to 8.84% of the taxable income
attributable to California. A minimum franchise tax of $800 is
imposed on all corporations that are incorporated under
the laws of California, qualified to transact intrastate
business in California, or are doing business in California.
Taxpayers must pay the minimum franchise tax only if it is more
than their regular franchise tax liability. Specifically:
1)Limited exceptions exist with respect to imposition of the
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minimum franchise tax. For instance, credit unions and
nonprofit organizations are not subject to the minimum
franchise tax and a corporation is not subject to the minimum
franchise tax for its first taxable year. However, even
though a corporation is not subject to the minimum tax in its
first taxable year, it will be subject to franchise tax in its
first taxable year based on its taxable income.
2)According to the Franchise Tax Board (FTB), for taxable years
beginning on or after January 1, 1997, only taxpayers with net
income less than approximately $9,040 pay the minimum
franchise tax because the amount of measured tax owed would be
less than $800 ($9,039 x 8.84% = $799).
3)LPs, LLPs, and LLCs that are doing business in California,
registered or qualified to do business in California, or
formed in this state, are subject to annual tax in an amount
equal to the minimum franchise tax, currently set at $800.
These entities (known as 'pass-through entities') are not
subject to any tax based on taxable income. Rather, the items
of income, gain, loss, deduction and credit are passed-through
to the owners and reported on their respective income or
franchise tax returns.
4)REMICs and FASITs are subject to and are required to pay the
minimum franchise tax. RICs and REITs organized as
corporations are also subject to and are required to pay the
minimum franchise tax. RICs, REITs, REMICs, and FASITs are
entities authorized by the federal government for special tax
treatment. California conforms in large part to federal tax
provisions but subjects each entity to payment of the annual
minimum tax.
5)LLCs and certain small corporations, solely owned by a
deployed member of the United States (U.S.) Armed Forces, are
exempted until January 1, 2018 from the $800 annual tax and
minimum franchise tax.
FISCAL EFFECT : The FTB staff estimate that this bill will
reduce General Fund revenues by $1.2 billion in fiscal year (FY)
2011-12, $800 million in FY 2012-13, $800 million in FY 2013-14,
and $850 million in FY 2014-15.
COMMENTS :
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1)The author states that, "Unemployment stands at 12.5% in
California. We need to get serious about making California
competitive and about bringing new jobs. If AB 166 becomes
law, California will once again begin to attract employers to
do business in this state. Ultimately, it will assist with
lowering the unemployment rate and putting Californians back
to work."
2)The author provided the following information on minimum tax
assessed by neighboring states:
a) Arizona assesses a minimum tax of $50 on financial
institutions, corporations and LLCs that elect to be taxed
as corporations.
b) Oregon assesses a minimum excise tax of $10 on financial
institutions, corporations and LLCs that elect to be taxed
as corporations.
c) Nevada does not assess a tax on corporate income but
imposes a license fee of $200 for the first year the entity
does business within the state, and $100 each subsequent
year.
d) Utah assesses a minimum tax of $100 on "C" Corporations.
1)According to the FTB, the following states currently assess a
minimum franchise tax:
a) Florida, Michigan, and Minnesota do not assess a minimum
tax on business entities.
b) Illinois assesses a $25 minimum tax on corporations
c) Massachusetts assesses a minimum tax of $456 tax on
corporations.
d) New York assesses a minimum tax on corporations of $25
to $5,000 based on the corporation's in-state receipts. It
also imposes a minimum tax of $25 to $4,500 for LPs, LLCs,
and LLPs based on their in-state receipts.
1)The opponents of this bill argue that AB 166 will result in
job loss in the public sector "without any evidence of benefit
to the economy of California." The opponents state that,
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instead the benefits will go "to many businesses who have
arranged their affairs to avoid direct taxation."
2)Committee staff notes all of the following:
a) The minimum franchise tax was enacted to ensure that all
corporations pay at least a minimum amount of franchise tax
for the privilege of doing business in this state,
regardless of the corporation's income or loss. Thus, the
minimum franchise tax is not technically an "income tax",
but rather it is a tax on the right to exercise the powers
granted to a corporation doing business in California.
Even when a corporation earns no income, it still receives
the benefits of its corporate status, including the limited
liability protection under the laws of this state.
b) California's minimum tax was increased from $100 to $200
in 1972. It was increased to $300 in 1987, to $600 in
1989, and to $800 in 1990.
c) Neighboring states assess a lower minimum tax than
California, but they also possess a much smaller market
share than California. California's current population is
about 37 million. Arizona's current population is just
over 6 million, Nevada's population is 2.7 million, as is
Utah's population, and Oregon's population is over 3.8
million. A business in California has access to tens of
millions of additional customers than a business in
neighboring states, allowing businesses the opportunity to
attain greater profits from a potentially larger customer
base.
d) Although the argument has been made that California's
minimum franchise tax may dissuade small businesses from
locating in California, statistics show that California has
a larger number of small businesses than neighboring
states. According to the U.S. Small Business
Administration, the most recent numbers show that
California has 3,475,399 small businesses. Arizona has
496,624, Nevada has 223,061, Oregon has 352,403, and Utah
has 245,532 small businesses. Even when accounting for the
differences in population, California has a greater
percentage per capita of small businesses.
e) It has never been shown that the minimum franchise tax
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discourages businesses, particularly, since small
businesses can always organize as sole proprietorships to
avoid paying the minimum franchise tax.
f) Because the franchise tax is the greater of the minimum
franchise tax or tax of 8.84% on the corporations' taxable
income, the actual beneficiaries of this bill are
corporations that report minimal taxable income and all
pass-through entities, regardless of the amount of income
earned. Consequently, profitable entities that are formed
as LLCs, LPs or LLPs will reap tax savings of $800 every
taxable year.
1)Related Legislation.
AB 2671 (Cook), Chapter 394, Statutes of 2010, exempts, until
2010, certain small corporations and LLCs solely owned by a
deployed member of the U.S. Armed Forces from the annual
minimum franchise tax.
AB 327 (Garrick), introduces in the 2009-10 Legislative
Session, would have reduced the minimum franchise tax from
$800 to $100. AB 237 was held under submission in this
Committee.
AB 2178 (Garrick), introduced in the 2007-08 Legislative
Session, would have reduced the minimum franchise tax from
$800 to $200. AB 2178 was held under submission in this
Committee.
AB 1179 (Garrick), introduced in the 2007-08 Legislative
Session, is similar to AB 327. AB 1179 was held in this
committee.
AB 1419 (Campbell), introduced in the 1997-98 Legislative
Session, would have reduced the minimum franchise tax for a
qualified corporation from $800 to $100. AB 1419 failed
passage in the Senate Revenue and Taxation Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
None on File
AB 166
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Opposition
California Tax Reform Association
Analysis Prepared by : Myriam Bouaziz/Oksana Jaffe / REV. & TAX.
/ (916) 319-2098